Okay, ladies and gentlemen, welcome to this presentation from SSAB. We are closing full year 2017, and we'll also talk about the fourth quarter. With us today is President and CEO, Martin Lindqvist, and also our CFO, Håkan Folin. And, we will start off with presentation by these two gentlemen, and we also offer the opportunity to ask questions afterwards. And here is how we have set it up. First, Martin will talk about, full year 2017 and the target 2020. How are we doing there? We have revised our financial and environmental targets, and then we come into the more numbers on the divisions and on the group, and Håkan then covers financials. Martin comes in again to discuss the outlook, and then we have Q&A as a final point on the agenda.
By that, please, Martin, start off.
Thank you, Per, and it's always nice to be called a gentleman. I mean, I appreciate that. Good morning. I will start with this picture and give a view of the market we saw during Q4. And if we start with the European market, and these are obviously, you know these pictures since before, these are obviously spot prices. We saw good demand during Q4. We saw the usual seasonal slowdown, a little bit less than what we have seen other years. I mean, we saw stable prices, and that means, I mean, that the seasonality is a bit less, or the slowdown is a bit less. I mean, if prices are moving down, we see bigger seasonality and vice versa. What with stable prices, I would say that it was a usual seasonal slowdown.
We saw inventories in balance, and we saw during the quarter, spot prices being fairly stable, and if anything, a slight uptick into or during the start of Q1. In U.S., we had a fairly strong, I would say, development over Q3, and when we released the report somewhere here, we expected to see prices or spot prices moving down during the fourth quarter. And then since November, we have started to increase prices for plate in North America. I think we increased prices with $150 per ton during Q4, valid from Q1, and then some other price increases, or one more price increase so far during Q1. So fairly volatile market. We saw also pricing sentiment. We saw increased demand from steel service centers. We saw...
That is typically apparent demand and low inventories, and I said, spot prices started to increase during the Q4 . This is mentioned as a target. This was a promise we gave one year and three quarters ago when we asked the shareholders to put in more money with the rights issue of SEK 5 billion on net SEK 4.9 billion. We said that we would be able to generate as much in free cash flow with a target or a promise to reach a net debt reduction of SEK 10 billion. We ended up close to that after Q3, and after Q4, when we closed this, we ended up at 12.2%.
We were overachieving the target with 22%, and 22% is, or actually just below 22%, is also where we ended with the net gearing end of 2017. In average, we have generated SEK 1 billion in free cash flow or net cash flow per quarter since that promise. We are on our way. These are the targets we presented during the Capital Markets Day in June, and we are on our way to reach those targets, and I'm convinced that we will reach them, both growth in special steels, automotive premium, number of Hardox wear parts, premium mix in, in Europe, and also market share in North America. I see a good possibility, and I'm convinced that we will reach that at the latest 2020. During December, the board also took the decision to revise the financial targets a bit.
Profitability target remains, where we are aiming for industry-leading profitability, and we measure that typically with EBITDA margins, and we have a peer group. Up until September 2017, we were number three, and in Q3, we were actually number one, and it remains to be seen where we come out in Q4. I mean, the other ones have not reported yet, so but this target stays. Capital structure, the new target is that we will have a net debt to equity ratio that normally will not exceed 35%, and at the end of 2017, we were at 21.7 or 21.75, so well in line with that target. Dividend, we had a dividend target of 50% on net profit with a lot of ifs and buts.
The new dividend target is between 30% and 50% of profit after tax, with a proposal from the board to be decided by the AGM of SEK 1, we are in the upper part of that range. That is, I think, close to 45% then of net profit after tax. Other targets, we have revised the environmental targets. We set up, I would say, fairly ambitious targets, 2015, with the net reduction of carbon dioxide of 200,000 tons and the reduction of purchased energy with 300 GWh, and reduction of residuals with 30,000 tons. The reason why we are changing or increasing those targets are that we reached them already 2017.
So we have set up new targets for 2020, where we will reduce the carbon dioxide emissions with 300,000 tons, energy with 400 GWh, and residuals with 50,000 tons. And this is, of course, an important part of our operations. We have also, during last year, come out with new sustainability objectives, where we state and claim that we will be completely fossil-free by the latest 2045. And, of course, the HYBRIT project is an important part of that, and we will, next week, the first of February, release the pre-feasibility or report the outcome of the pre-feasibility study. But there are other important actions ongoing in there as well in order to become fossil-free.
On the journey towards 2045, we have said that 2025, we will help our customers to save 10 million tons annually of carbon dioxide emissions. And, and I know that this is not scientifically correct, but then, the latest 2025, we will be carbon neutral. And so 10 million tons is approximately what we emit as a company in our operations. Moving in then to Q4 in 2017, and performance by divisions. We ended up with an EBIT of SEK 3.8 billion, which is an improvement of SEK 2.6 billion compared to 2016. It is a lot about higher prices, higher volumes, but also higher raw material cost. We had, during 2017, a strong operational cash flow to, 6.5 billion.
I said at the end of last year, we had a net debt of SEK 11.66 billion, corresponding to 22%. We had an earnings per share of SEK 2.23, and the dividend proposed by the board of one krona per share. In Q4, EBIT ended up at SEK 843 million, an improvement compared to Q4 last year of a bit more than SEK 700 million. Higher prices, higher volumes, the insurance compensation, we settled that claim or that dispute during Q4. We also saw higher cost of raw material. We had also, during Q4, a fairly strong, what I would say, strong cash flow, an operating cash flow, almost SEK 3 billion. If you look into the divisions then, Special Steels improved with SEK 560 million, compared to 2016.
We had slightly better shipments compared to Q3. We see a continued good demand. We're increasing demand from mining and construction machinery. We continue with the process of upgrading customers, and that is moving along according to plan. And, I think it was, maybe some pressure on margins in, in Q4 in Special Steels and, and prices, and that should be, I mean, normalized more going into 2018. If you take SSAB Europe, they were just shy of SEK 3 billion in full-year EBIT. They had a fairly good or a very good development compared to last year, and that was mainly driven by higher prices and a better product mix. We had also an increase, a small increase of shipments compared to Q3.
We continue to see a very strong demand in heavy transport, and our automotive premium product continued to grow during the fourth quarter. If you look into Americas, the full-year profitability improved slightly. The EBIT in Q4 was negative, slightly less negative than during Q4 last year. We saw, during the quarter, improved demand from steel service centers. We also saw improved demand from heavy transport. And what we experienced during Q4 was significant price pressure, and we talked about that in the beginning. Spot prices moving down, bottoming out, and then going up, so. But during Q4, we saw a significant price pressure. Tibnor, fairly okay, I would say. Full-year improvement of SEK 146 million, primarily due to better margins.
I think that Q4 was also quite good, and they followed the Nordic market with maybe slightly less seasonal slowdown than expected. Ruukki Construction, we talked about that last time. The first three quarters during 2017, we experienced margin pressure. We were not able to compensate for increased input cost, higher steel prices. We did that during Q4, so we had better margins. We had, call it, more normalized margins. We had better volumes, so full year, we ended up at exactly the same level as 2016. So I would say a fairly strong fourth quarter in Ruukki Construction. So, Håkan, if you would like to take us through the financials.
Thank you, Martin. Good morning, everyone. I will, as usual, give you some more details on the figures, go through the EBIT bridges, what happened between the quarters, spend some time on the balance sheet and the raw material situation. This time around, I will also focus a little bit more on working capital development, also long-term trend on cash flow and on investments. But starting looking at our profitability development, as Martin said, we had a strong improvement in profitability in 2017 compared to 2016. And what I think is also worth noting is that in each quarter, we saw a margin expansion if you compare to the same quarter last year, which you can see in the two graphs below here.
The EBITDA margin, if you compare quarter-over-quarter, and also EBITDA ton per delivered steel, we saw a constant improvement in our profitability. We did that actually with shipments being slightly higher than last year, but there's no major drama in how the shipments have developed. It's really a lot about that we improved our mix. We're selling more of the premium products within SSAB Europe, and we're selling more Special Steels volumes. Look at the change in the operating profit, and we start by looking at Q4 versus Q4. We went from slightly above SEK 100 million up to SEK 843 million, so an improvement of SEK 700 million. That came to a large extent from better pricing, and Europe is the main contributor here, but also better prices in Americas and Special Steels.
Then we also see higher volumes contributing with SEK 280 million. That's almost exclusively coming from high volumes in Special Steel. And this is then counteracted by variable cost increase of SEK 1,250, and that's almost exclusively on the raw material side. We also have higher costs now in Q4, higher fixed cost, partly because we have more maintenance costs, and then partly because of the overall higher activity level. I'll come back to more, bit more details on the fixed cost. And then in other here, well, FX is basically zero, and then in other, the SEK 440 million, it's both coming from the compensation for the breakdown in Oxelösund.
It's also coming from we have, better unabsorption in this quarter, or rather, lower unabsorption Q4 this year, especially for Special Steel, where in Q4 2016, we had a maintenance outage, but now in, in 2017, that took place in Q3 instead. Well, all in all, year-over-year, an improvement with SEK 700 million. If we then look instead what happened from Q3 to Q4, we actually saw a slightly lower result. It was down with around SEK 250 million. Prices impacting negatively with SEK 320 million, and there, it's actually quite a mixed picture. We have slightly better prices in Special Steel. In Europe, it's slightly lower, but that's mainly coming from mix change, in Q4, as we normally experience.
But then within SSAB Americas, in the second half of Q3, we saw a quite strong negative development on plate spot market prices, also first half of Q4. Then they started moving up, but we are not yet seeing that in our P&L, but we are seeing the downward trend from the second half of Q3 and the first half of Q4 in Americas. Higher volume, Q4 over Q3, it's coming a little bit of everywhere. Special Steels, Europe, also Tibnor, counteracted by especially Ruukki Construction, where Q4 in the construction industry is always seasonally low. Variable COGS, not so big difference. On the fixed cost side, we have an increase, and we always have seasonally low fixed cost in Q3, given the Nordic operations and the summer vacation reserves. We had a few type of one-off items as well in the fourth quarter.
Some positive impact from FX, and then we have other here, again, being rather large, and it's basically the same factors. Again, it's the compensation for the breakdown, and it's also lower unabsorption, given that especially in Special Steel, we had the yearly maintenance out in Q3 and not in Q4. But all in all, slightly lower result now in Q4 with around SEK 250 million. If we then look at the full year, the bars become a bit bigger, and we see an improvement, almost tripling the result from 1.2, or rather more than tripling, from 1.2 up to 3.8. Price being a very large contributor, SEK 6.3 billion. In price here, it's important to remember, we also have the mix impact.
And when we sell more of the premium products, more of the automotive products in SSAB Europe, they're being sold at a much higher price and also at a better margin than if we only sell a standard hot-rolled coil. So Europe is the main contributor here, and it's both the market prices, but also to a large extent, mix improvement. But year-over-year, we also have higher prices in Americas and in Special Steel. On the volume side, overall, the group volumes are up 4%. A large portion of this SEK 800 million result impact is coming from the higher volume in Special Steel. You can say that the higher prices are counteracted by higher variable cost, and again, to a very large extent, this is driven by the increase in the raw material. And we have basically seen that increase everywhere.
It's on the iron ore side, it's on the coking coal side, it's also on the scrap side. Then year-over-year, we have higher fixed cost of SEK 550 million. It's partly explained that we have more planned maintenance cost in 2017 than in 2016, but it's also because the overall higher activity level. And when we move into more advanced product mix, we also do more with the products. We do, we do more cutting, we do more slitting, we have produced more tubular products, et cetera, more heat treatment, and then that result in higher fixed cost. What we actually have done is we have not increased the manning of SSAB. Actually, on the other hand, we have, during the year, had a slightly reduction in employees at SSAB.
But what we instead have done is when we have needed an extra shift in a cutting line or in a tubular line, we have done that using temporary workers... So we have kept the base manning low. For those of you with good memory, you'd remember that after the merger between SSAB and Ruukki, we reduced overall manning with more than 2,500 people, and we have actually kept that base manning, and then instead, we are using temporary people. And what that implies is that if, or maybe rather when, we will see a downturn coming, we can rather quickly then go down in back to our base manning, and we can do that without initiating a large cost structural program, but we actually already have that in place. FX year-over-year, fairly unchanged, and then other positive, SEK 500 million.
It's again, the compensation in Oxelösund. It's also slightly bit lower on absorption cost. That's coming mainly from Americas and Europe. Special Steels actually slightly negative, given the breakdown in Q1. If we move to cash flow, Q4 was, as Martin said, very strong cash flow quarter. Net cash flow, SEK 2.6 billion, operating cash flow of close to SEK 3 billion. This is coming, of course, from the result, but it's also coming a large positive contribution from working capital. When we look at the full year, we had a net cash flow of more than SEK 5 billion. That's an increase compared to 2016, with SEK 3 billion, basically, SEK 5 billion against SEK 2 billion.
For the full year here, I think it's worth pointing out, we have a slight positive contribution from working capital, and we are doing that despite having actually an increase in sales of 19%. We have changed the way we are working with working capital this year. If we spend a little bit more time on working capital and what we have been doing then during the last year and a half, I would go back to saying what, when we released this SEK 10 billion net debt reduction target, we said that working capital would be a key contributing factor. We also said that since the merger with Ruukki, that had not been on our top priority list. We focused on being out with the customers, we focused on the synergies and other cost reduction items, we focused on the manning reduction.
But since a year and a half, or maybe a little bit more, working capital has been on top of the agenda. We can see that we have gone from being here, about 26% of working capital over sales, and we are now slightly below 23, ending the year at 22.8%. We have done a lot of activities in the division, on group level. We will continue this also during 2018, and we see that changing the way we work structurally, we have potential to continue to reduce this ratio further. If we then take a little bit longer look at investment, we had very low investment level in 2016, at only SEK 1.3 billion. Fairly low, continued still in 2017 at SEK 1.6 billion.
And then, as we have said before, going forward, we should be at or around SEK 2 billion. Now, given that we had slightly lower years the recent year, it might be that we might be somewhat over, but around that level. We have the main production facilities in place in order to reach the 2020 target Martin talked about before. And we will, as we said before, keep capital expenditures below depreciation. And we can do that because since the merger with Ruukki and SSAB, we don't need to invest the same things in Sweden and in Finland. We have done large relinings during the last few years. They are not upcoming now. And we did a large strategic CapEx program, 2010-2012, where we invested in order to really be able to grow Special Steels business.
Where we will focus our strategic CapEx from this year onwards is within Automotive. There, if we're gonna keep this 20% growth year on year, we need to invest some in order to support that, and we also want to expand within our service business. We look at the cash flow trend, we can note that 2017 was a very strong cash flow year in historical perspective, with cash flow from current operations above SEK 5 billion. I think it's also worth noting that since 2011, although markets has been going up and down quite a lot, we have, the last seven years, been able to generate positive cash flow. And what do we see when we look forward then? Well, we see that we have ability still to improve our profitability.
As said, we believe that we are fairly well invested, and we have a potential to reduce the ratio of working capital over sales. Given that net debt have decreased quite a lot, I'll get back to that in a second, we will also have lower interest costs going forward, and we should have a tax rate of around 20%, given now that Sweden, Finland, and also U.S. are at that level. So all in all, when we look at it, we foresee that we should have a good potential to continue generate solid cash flow. If we then move over to the balance sheet side and the debt, well, the cash flow we just talked about have, resulted in we have see a sharp decrease in the net gearing, and also in absolute, net debt level.
The net gearing, as Martin said, is now below 22%, moved down from being at 34% at the end of 2016, and being at 27% at the end of Q3. The absolute debt level is now below SEK 12 billion at SEK 11.6 billion. And you can see that in 2014 and 2015, we were around SEK 25 billion, so we've seen a quite big decrease in our net debt level. On the maturity side, we have around SEK 10 billion maturing in the coming three years. You can match that with our backup and cash facilities of around SEK 12 billion.... out of these maturities, it's very limited.
That is commercial paper, and it's not because we don't like that market, but it's because given the cash flow generation we've had, we have basically been repaying everything that has been maturing the last few quarters, including bonds, including bank debts, but also including commercial papers. If we look at the duration, it's now at 5.5 years, and the change from Q3, it's not because we've been taking up new long-term loans, but we've been repaying things that have been short. So all in all, when we look at the balance sheet and we look at the net gearing, the absolute level, and also the maturities, we are quite comfortable with our debt situation. Moving on to raw materials, starting with coking coal and iron ore. Coking coal prices in Q4 were 4% higher than in Q3.
However, as we have talked about before, we don't buy very much in Q4, given that we have winter stocks in raw and up in Luleå. We buy the main part of our coking coal in Q2 and Q3, so it's mainly, it's mainly these purchase points that will impact the our P&L in Q1 and Q2. For iron ore, our average purchase price in pellets was unchanged in Swedish krona. It was slightly down in US dollars. What we have seen now in the beginning of 2018 is that these prices have started moving upwards. Then, when we look at scrap, which we obviously use in our two electric arc furnaces in North America, all in all, in Q4, it was basically at the same level in the end of Q4 as in the beginning of Q4.
What we have seen in December and also now in January, as you can see on this chart, that spot prices for scrap have started to increase. And scrap, we turn around quite quickly, so the December and the January increase, you will see in our P&L, basically in Q1. And that's why we also talk about in the outlook. That's one of the reasons that we talk about the higher raw material prices. Finally, from my side, some words about the maintenance outage. Starting with what we had in Q4, we had slightly below SEK 200 million being in our operations in Europe on the Finnish side. And when we look at the full year 2018, we are estimating we will be slightly below SEK 900 million, while in 2017, we were slightly above SEK 1 billion.
The reason why we will be slightly lower this year is that in 2017, we had a very large maintenance outage in Mobile, in the U.S., where we hadn't had such an outage for almost 3 years. This year, we will have an outage in Montpelier in the second half of the year, but it's not gonna be of the same magnitude as it was in Mobile. With that, Martin?
Thank you. So looking into Q1 then, I would say that it looks quite okay on, on all markets and in all segments. And if we try to split it, I would say that in North America, demand for heavy plate is expected to be good, both apparent and real demand. In Europe, demand for strip and heavy plate is expected to remain good, and high-strength steels expected to continue to show positive development. Our shipments are expected to be slightly higher, and you see it per division here, the volume trend, Q1 versus Q4. And we also expect overall, the realized prices to be higher in the first quarter, or slightly higher during the first quarter compared to Q4.
As Håkan pointed out, to a certain extent or to some extent, counteracted on, on, by, by higher raw material costs in Q1, and we have no planned maintenance outages during Q1. If I would then try to sum it up, looking forward, I would say the top line growth will be driven by high-strength steels. I think the whole market leadership, the growth, and the mix improvement will continue to support SSAB's profitability development. I think we have a good or a stronger balance sheet than we had a year ago or two years ago, and you should expect us to continue to generate positive cash flows. We have, within operations, a lot of initiatives within continuous improvements ongoing that will help us to further improve profitability.
As Håkan pointed out, we feel that we are well invested to reach the targets we have set up, the growth targets we have set up for 2020. So we are feeling very... or I'm feeling very confident that we will meet those targets as well. So with that, Per, I think we open up for-
Yes, and please, Håkan, join us also.
Comments, questions, and good advice.
We can take comments, questions, both from the room and also from the telephone lines, and we start here in the room. Please state your name and company. Also, if you have more than one question, please state them just one at a time to give the gentlemen a chance to answer each question so we make it smoother. So please, start off here, Johannes.
Okay, thank you. Morning. It's Johannes Grunselius, Handelsbanken. My first question is on the special steel, where you continue to show really good volume growth. I think it was the best volume growth ever, year-over-year. But still, the EBITDA per ton were rather low, so really low. If my calculations are right, SEK 240 per ton, and you have achieved SEK 400 per ton a year ago in a good quarter. So what has happened in this quarter? Why you don't get the traction from the better volumes here?
I think there are a couple of explanation. First of all, there is a time lag for price increases. We are now, I mean, we have fairly long lead times, so that is one explanations. We had in Q4 a rather thin mix. I mean, special steel is everything between 700 megapascal material, which is, I mean, the low end of special steel up to, I mean, Hardox HiTuf and thick Hardox plates, which, and the margins are obviously completely different between 700 material and the most advanced Hardox products. I would say also a thin mix in Q4. And then we had some smaller one-offs. We cleaned up some inventories end of Q4, what we call dead stock.
So, I would say, yes, slightly lower margins, but we will see better margins, I call it, and more normalized mix going forward.
So that's my follow-up. And I know you don't want to specify margins for the coming quarters, but anyways, how relevant is this margin that we saw in the fourth quarter? How achievable is what you have done as a record, more than 20% margin on EBITDA? I mean, if you can just get a feeling for what we should expect in the future.
I mean, it is very mix dependent. I mean, the margins for 700 megapascal material, they are closer to what margins that we see on the higher end in Europe. And the Oxelösund products, they have much better margins. So it is about mix. So, I mean, we have suffered during 2017 of the breakdown and others, and we have been, I would say, also a bit slow, and we talked about that last time, to compensate for increased raw material. But with the normalized production in Oxelösund, the normalized volumes, we should see better margins per ton.
Ola Södermark, Kepler Cheuvreux. Is it possible to quantify the impact of... You still suffer from the impact from the last year in Oxelösund. Is it possible to quantify? And you also mentioned that you have some white one-offs in special steel.
In total, we got the insurance coverage or the compensation from the insurance companies and some suppliers during Q4. That did, of course, not fully compensate for the cost we had in 2017 due to the breakdown. I mean, the breakdown itself was, of course, a big hit, but then we also had problems with lead times. We had problems with transport. So I don't want to give out the full, the exact number, but it was not compensated for by the compensation, so to say.
It's still not maybe material, but close to material in Q4?
Some problems still with transport and so on, and, and maybe lead times, long lead times on, at least beginning of Q4 on these thick plates and these more advanced Oxelösund products, yes, and that affected the mix. How much is that? Hard to say.
Thank you.
Okay. Do we have any further questions from the room? Seems not. Then I will ask the operator, please, to open up the questions from the phone lines. So operator, please.
Thank you. Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad. Our first question comes from the line of Alain Gabriel from Morgan Stanley. Please go ahead. Your line is open.
Yes, good morning, gentlemen. Just two questions from my side. Firstly, on the absolute net debt figures, you've reset your financial targets at the back end of last year, and you've given gearing ratios, but you have shied away from giving absolute net debt targets. Are you comfortable with the current financial leverage at this time, or will you seek to reduce the absolute level further going forward, given that we are close to 1.5-2x net debt, EBITDA, at a positive point in the cycle? That's one, and I'll save the next question.
Maybe we can start with that one. I mean, as said today, we expect to continue to generate strong cash flows going forward as well. And we are running a three-year program when it comes to working capital efficiency. I think we kept working capital in absolute terms fairly stable this year, even though we had a fairly sharp increase in sales. I think there are still possibilities there, and we are right now in line with the targets we have set up for that first year of the three-year program. And as Håkan pointed out, and we have talked about it before, cash flow optimization was not the major topic during the consolidation or the acquisition of Ruukki. It was rather flexibility and operational performance.
So I, I expect us to continue to generate good cash flow for the coming years, and, and that would, everything else equal, lower the net debt.
Okay, thank you. And the second question is on the Ruukki Construction. It looks to have fallen a bit in the background in terms of the discussions. With current activity, construction activity picking up in Europe, do you think that you will focus more on that business in terms of strategic options for a potential disposal or tie-up or anything of that sort in 2018? Thank you.
I think, Ruukki Construction was, as I said during the presentation, in a bit of a margin squeeze, Q1 to Q3, and, and we were not able to fully compensate for increased input costs, meaning higher steel prices. I think we saw a positive development of that during Q4, and Q4, I mean, taking away the seasonality and everything, I think was quite okay. I mean, Russia is still fairly slow, but we saw, I mean, the, call it the more important parts for, for SSAB within Ruukki Construction, roofing and, and components, the parts taking the majority of the steel volumes, good development in, in, in Q4. What that will mean for the future, well, let's come back to that if and when, when.
Thank you. Our next question comes from the line of Seth Rosenfeld from Jefferies. Please go ahead. Your line is open.
Good morning. I have two questions. Starting out on your outlook for realized prices in the U.S. You noted in the release earlier that you expect recent spot price recovery to be gradually reflected in ASPs during Q1 and also subsequent quarters. And given that your U.S. business is principally spot-based, to my understanding, why would we expect a slower lag in the coming quarters? Can you perhaps give us a sense of the sequential price expectations for Q1 and again for Q2? And then I'll follow up with a second question after, please.
We have contract structure in U.S. as well, and that's why you also saw spot prices or realized prices in Q4 being much lower. We saw the trend of decreasing prices starting already in Q3, but we had fairly stable prices and decent margins in Q3, and then you saw the hit in Q4. So it's a combination of, call it spot prices, quarterly prices, and also some contract orders. So it's a combination, and that's why it will gradually be seen. So we will not see everything from first of January, but we have increased, I think it's $150 per ton during Q4 from Q1, and then another $30 per ton in Q1. So we'll gradually see that during Q1.
And then it's also about lead times. Lead times on average for plate manufacturers right now in the U.S. are estimated to be around 8 weeks, which then is close to 2 months. So if we do another price increase or the one we did in January, if we have a lead time of 8 weeks, that will obviously take some time before that flows through our P&L.
There is a lag of half a quarter or so, up and down, average.
Okay. Thank you. And one second question, please. On coking coal procurement, obviously, you have extreme seasonality in when you actually take delivery of coking coal because of winter weather. Given that we saw, kind of since you stopped ordering coking coal, a big surge in coal costs, and now prices are falling quite rapidly, how should we expect your own realized coal costs to develop again in Q1 and in Q2 if we continue along this spot trend? Thank you.
Yeah. We buy. We have three sites using coking coal, Raahe, Luleå, and Oxelösund. And for Raahe and Luleå, we have this winter storage. For Oxelösund, we continue buy year-round. So you will see some of the impact that you see on the spot market will also hit us, and that will hit then the special steel in Oxelösund. But if you... For the main majority of the part, if you look then at what we bought in Q2 and Q3, that is mainly that will flow through the P&L in Q1 and Q2.
Okay. Thank you very much.
Thank you. Our next question comes from the line of James Gurry from Credit Suisse. Please go ahead. Your line is open.
Hi, thanks very much for taking my question. Congratulations for meeting the net debt target that was set a couple of years ago. And just in relation to that, the balance sheet is looking quite good. Your cash flow outlook seems quite good. And you have lowered that potential payout ratio for the dividends. And I'm just thinking, in terms of capital allocation, what acquisition possibilities do you see out there, particularly, that might be shaken loose, as we see, consolidation of some of your competitors out there? In your mind, what sort of acquisition opportunities might be there from a strategic perspective, and would they help you achieve your goals for 2020?
I think we have the setup we need to achieve the goals for 2020, so that's not an issue. I'm very confident that we will, with the current setup and the current operation and the current investments done, achieve those targets. I think it's also important to have a strong cash flow generation, and also have a strong balance sheet. Even though we are, maybe as a steel company in relative terms, a bit less cyclical, we are still in a cyclical business, so I think we should have a strong balance sheet. And then what potentially will shake out from ongoing consolidations, what kind of assets, to be honest, I don't have a clue.
Right. Okay. What would you like to acquire if you could acquire something?
I haven't thought so much about that, to be honest.
Okay. Can I-
But there could potentially be something. I mean, as Håkan pointed out, I think in the service business and the aftermarket business, we have ambitions, and from time to time, do some acquisitions. There could be other possibilities, but in Swedish, we say, "Den dagen, den sorgen." I don't know the English expression, but...
Okay. Can I just ask on the cost side of things, can you just explain... We've gone through coking coal and things, but what about the electrode costs, particularly for the U.S. business? Obviously, the margins have expanded there, at a spot rate, so far this year. But just explain year on year, how we're looking in terms of electrodes, and how that might affect the cost base.
No, I mean, electrode costs, obviously, especially on the spot market, have skyrocketed during the last year, and that will have an impact for us now from Q1 onwards, I would say, as it looks now for 2018. Then we don't specify exactly how much that is, but, I mean, from a historical point of view, it's been basically negligible, and now it's, it's not negligible anymore, but it, it will have an impact on our cost, yes.
Is it something that we should be aware of and conscious of as we make our estimations?
Well, I would say it's something that's large enough anyway, that if you don't include it at all in your estimation, you would get a too high, a slightly too high margin, yes.
Is it a real game changer? No, it isn't.
Okay. Okay, sure. And does that include these comments might include refractory bricks as well? 'Cause I noticed those-
Yes.
The costs have gone up.
Yep.
Yeah. Okay, thanks very much.
Thank You. Our next question comes from the line of Oscar Lindström from Danske Bank. Please go ahead Your line is open.
Yes. Hi, good morning. Four questions from my side. The first one is on the special steels division, where you—I mean, if I just understand what you're saying correctly, the volumes that we saw in the fourth quarter, they should be a good reference point for where we should be for 2018. But the EBITDA per ton or margin in the fourth quarter was abnormally low, and that should normalize to a higher level in 2018.
Yes.
Sorry, I didn't pick that up.
No, it was a simple answer: Yes.
Okay. Yes. Great. And then, following up on that a little bit on the special steels division, mining and yellow goods segment, momentum seems to be very good, with a lot of the equipment producers giving rather bullish outlooks. Do you share this view? And to what extent have you seen it in your business and/or in orders, for that matter, already?
We have seen that in our order intake, yes.
Has it impacted your volumes already, or is it something that's ahead of us?
Yeah, we have seen a strong order intake, and so we have seen the effects of that, yes.
In deliveries also,
Yes. Partly, yeah.
Partly, yeah. All right. And then just on Americas, I think one of the previous questions came in a little bit on that. But in Q3, the earnings were boosted by this large energy contract that you had. In Q4, that was absent, I presume. Are there any such sort of lumpy contracts which will impact Q1, that you know already and that you can inform us about?
I mean, the energy contract in volume-wise was quite okay in Q3, but profitability-wise below average. So that was, I mean, maybe it gave us some more, call it, certainty then to be firm on pricing. But I mean, the contract by itself wasn't a fantastic margin, so it was more a base load. And then into Q4, volumes were not that bad, but we rather saw a margin squeeze, the difference between prices and scrap. And we expect volumes to go up in Q1 compared to Q4, but we also expect better margins. And then there are always contracts, I mean, for line pipe contracts and other contracts of different volumes in the market.
It's, I mean, we look at them and decide, do we want to take this or not? And sometimes we take them to get the base load, or sometimes we take them because they are very profitable, and sometimes we say that, "Well, let someone else take it," and fill up the mill.
Thanks. My final question is on CapEx, where you guide for CapEx levels to be up in 2018 and onwards, and you talk about a sort of generalized level of around SEK 2 billion per year. And you mentioned specifically needing to make some investments in the automotive high-strength steels and on the service side. I mean, how—what should we expect for 2018? Is that SEK 2 billion, or is it sort of an average?
What we have said that over time, for the coming years, we said, I think we have said that for 1.5 years, so we should be at or around SEK 2 billion. 2016, we were obviously quite a bit lower-
Yeah.
-and 2017, somewhat lower. And what Håkan showed now is roughly SEK 2 billion. Well, if we were, for the last two years, below SEK 2 billion, you... We could one year or two be slightly above SEK 2 billion, but SEK 2 billion is more an average that we are aiming for, with pluses and minuses.
Really? Yeah. So, so the 2017 level, was that. Just looking at the, the chart that you have there, it seems that most of the, or much of the increase anyway, from where we were in 2017, is due to, what you label strategic CapEx, and I presume that's the automotive high strength and the service expansion.
Yes.
I mean, how much of a done deal is that? Or is that, you know, is it going to happen in 2018, or is it something that you plan for in a couple of years?
We have an ongoing expansion project within automotive running in Borlänge, and that is included in the figures for 2018. But I think what I mean, we are really—we are, of course, cautious when it comes to spending capital, but we also have a balance sheet, and we'll get even more so going forward, a balance sheet that we can afford to invest in what we feel is necessary to develop the business. And that's what Håkan was trying to show with this picture. So, probably slightly higher in 2018, and part of that is the ongoing expansion within automotive, where we have the contracts and the volumes to fill that expansion. So it's more, call it, debottlenecking then.
And you say you already have those contracts to fill that expansion?
We know to what cars and what models the volumes will go. So yeah, we have a fairly good feeling of how that will play out.
Okay. That's interesting. Great.
...Well, you know, those were my questions. Thank you very much.
Thank you. Our next question comes from the line of Carsten Riek from UBS. Please go ahead. Your line is open.
Thank you very much. Three questions from my side. The first one on the U.S. operations. When do you believe the U.S. operations turn the corner profitability-wise on a sustainable basis? Do you need Section 232 to see it?
First of all, we don't know what the potential Section 232 will mean. And as we see it, I mean, there is. Over time, we have been generating good cash flows from the American business. Q4 was, profit-wise, not fantastic. I think that Q3, in relative terms, were quite okay, and we expect Q1 to be better than Q4. And then in the long run, what potentially Section 232 will mean and so on, I don't know, to be honest. But we see a positive development in underlying demand in North America for plate. We also see needs of further plate or call it plate-related investments in infrastructure and so on.
As we have, some of you have pointed out, I mean, we also see positive outlooks from, call it, customers that typically use a lot of plate, like Caterpillar, Komatsu, John Deere, and so on.
Okay, so, so you don't bank on the Section 232, let's put it that way?
To be honest, I don't really know what the potential Section 232, if it comes, what it will mean. So, I don't know, to be honest.
Okay. Okay. The second thing I have is on the maintenance outage, because last year you said, 2017 will be an exceptional year. The new outage table looks like it's lower, but it's not substantially lower, let's face it. Is the, the outages, the maintenance outages, should we actually rather look at it as a recurring item in the range of between SEK 800 million and SEK 1 billion, or even maybe SEK 1 billion at the upper end, given that your CapEx to D&A seems to be still smaller than the one from ArcelorMittal? Could you comment on that, please?
Typically, we definitely have a maintenance outage in the Nordic operations at each site once a year. And then in the 2 North American sites, we have it, I would say, between every 18-36 months or something. I call it average, every 2nd year or something. You should expect us to, as we have always had, that kind of maintenance pattern.
I think if you assume what you said, you know, between SEK 800 million and SEK 1 billion, that sounds like a fair assumption for the coming few years.
Perfect. The last one is on the net working capital reduction you had in the fourth quarter, SEK 1.7 billion. You already mentioned you had a good movement in inventories, but about, if I'm, if I'm correct, about SEK 1 billion came out of payables and receivables. How much will reverse of this roughly SEK 1 billion Swedish krona move in the first half of 2018? And, should we actually think about a net debt pattern, which rather moves up in the first half than down?
No.
Okay. So you don't expect that will reverse?
Uh, no.
Okay, interesting.
No, but I said, I mean, we, we are in a three-year program, and there is always a time lag when you work with structure changes in, in inventories and so on. And, and, maybe we were a bit, as always, a bit slow in the start, but, but I expect us to, to continue to see, call it working capital efficiency, moving in the right direction. That's what we are planning for and what we are working with.
Okay, perfect. Thank you very much.
Thank you. Our next question comes from the line of Bastian Synagowitz from Deutsche Bank. Please go ahead. Your line is open.
Yes, good morning, gentlemen. I've got three questions left. I'm now starting maybe with the maintenance breaks. I think I don't remember since you've been doing or when you've been doing such a large maintenance break across the units in just one single quarter. Could you just maybe give us a bit of a volume guidance as to what may be the volume shortfall just from all of these breaks, which you will be taking in the fourth quarter? And then my second question would be following up on the elsewhere. I think you already commented a bit on cost and margins. And I think clearly we should be seeing a decent improvement in the first quarter.
You already mentioned or made a few comments, but do you believe that Q3 levels appear achievable from an earnings point of view, given the plate price trends? Or will the price dynamics be skewed a little bit further into the second quarter? That those would be my first two questions, and stop you before taking my last one.
But, I mean, if I start with a general comment on the maintenance breaks, I mean, as said, we need to do the maintenance breaks, or the maintenance outages in the Nordic systems every year, and then we try to balance that. So, I mean, we could do it in Q3, or we could do it any quarter, of course, but we could typically do it, or usually we did it in Q3, all the maintenance outages. But we try to balance that now and play it a bit smarter, and so we had part of it in Q3 and part of it in Q4. And it is, I mean, given the seasonality in everything, it is very often wise to spread that out between quarters.
The problem is that when we are doing maintenance in the hot end, I mean, if the weather is extremely cold up north, we can run into problems when we restart blast furnaces and so on. So it is a balance, but we can play it or we can shuffle around a bit with it during Q3 and Q4, typically, and that has changed a bit over the years. If you go back a couple of years, we always did everything in Q3. And then as said, in the North American operation, we do it when we feel it's necessary, and there we are less dependent on weather conditions. So it's mainly weather conditions or expected weather conditions, deciding when we do the maintenance outage and trying to balance that towards apparent demand.
Which I think makes a lot of sense. I think it's basically positive that you skewed it now into the second half, and you basically able to capture the what it seems to reasonably be strong trends, which we will see probably in the first half. But so roughly what-
It's always, of course, a guesstimate where the apparent demand will go, because the lead times of planning a maintenance outage is, I mean, it's nothing you can decide on a Friday and then start on a Monday. There are fairly long lead times, so there will always be an element of, call it, speculation then.
Sure, sure. But what will be the sort of volume loss on shipments, if there will be any, in the fourth quarter, given that in Europe, in special steels, and then also the U.S., essentially, in all of these three core divisions, you'll be having a maintenance break, and surely to some extent, it will be impacting the volume. So what will be the volume impact, if you could quantify it, just roughly speaking?
Well, I'm not sure if I understand you now, Bastian. We will not have any maintenance breaks in Q1. In Q4, we had in SSAB Europe, but that was the only division, and, I mean, that we are done and over with. So, for Q1, we will not have any impact on shipments from maintenance breaks.
Of course, no, sorry. I'm just referring exclusively to the fourth quarter.
Okay, okay. And the fourth quarter, then it was in SSAB Europe, and there, yes, we had an impact of lower shipment due to the maintenance breaks. Yes.
Sorry, sorry. Maybe just to be clear again. So yeah, I was referring actually to Q4 in the upcoming year, given that you plan to have maintenance breaks across all three-
Aha, okay.
Core divisions. I think just from that point of view, it's probably fair to believe that there will be some sort of volume impact on group level, and, to get a rough understanding for that, that'll be helpful.
Okay, and then I understand. Yes, I mean, the break, the maintenance break in Europe will basically be similar as we had this year. And then we are planning for special steel in 2017, we had it in Q3. We are now planning to have it in Q4, instead, and that will obviously then have an impact on shipments for special steels in Q4, somewhat. What we try to do when we have the breaks is to build up inventory and produce a little bit more ahead of time, but, of course, we will lose some shipments then in Q4.
As we do every year.
Yeah. And in Americas, yes, it will be the same, I mean, for the Montpelier business, when we have the impact, when we have the breakdown in Q4. So I think it's probably most relevant to compare division by division and then add it all up, rather than take it top down instead.
Okay, okay, got it. Then on the US, do you think Q3 levels, essentially the $400 million plus profit, do you think that that is realistic to achieve in the first quarter, given the price trends? Or will the price dynamics be skewed further into the second quarter in the US?
Let's come back to that in a quarter.
Okay. Okay, fair enough. And maybe, then just the last one on capital allocation, which is a bit of a follow-up to James' question. Essentially, you've hit your balance sheet target, and you've done really, really well on cash flow, and you keep guiding for SEK 2 billion CapEx. There's no reason why cash flow should worsen. At the same time, essentially, you cut your ambition for the payout ratio to 30%-50% from 50%, but literally at a time when all of your operational numbers and also updated targets suggest that you could easily, essentially, pay more than that. All of that sounds a little bit counterintuitive. So is the idea here simply to stockpile cash beyond your balance sheet targets and possibly prepare for another larger M&A move?
No, I mean, we are, as said, in a cyclical business. I mean, we had a net gearing target of 30%, with some ifs and buts. And I've been in the company for a long time, and we were debt-free for many, many years, and then we were obviously way above 30%. I think we should have in this industry, even though I think after the combination with Ruukki or the acquisition of Ruukki, we are less, in relative terms, less cyclical. We still need a strong balance sheet. And we... Was it one or almost two years ago, we were also discussing the balance sheet a lot in this forum, but from a different angle, and I think we should have a strong balance sheet.
And I don't see this as then what we do with the generated cash flow. I mean, now we start, which I think is very good, to pay dividend, actually, the first time since 2012. And I think a profitable company with a decent balance sheet should pay dividends. So I think we are, I mean, moving along according to our own expectations and our own plans.
Mm-hmm. Okay, so, so it seems basically you've given a gearing target, but it seems there's actually also below the surface, a certain net debt target, which you have in mind. Is this to be net debt free, in fact, as to say, in this industry, or?
But, of course, we look at net debt to EBITDA and absolute term net debt and so on. So, of course we do that.
Mm. But is there like an absolute net debt level, which you essentially aim for?
... No, but we aim for reduced net debt.
Okay. All right. Thank you.
Thank you. Our next question comes from the line of Luc Pez from Exane BNP Paribas. Please go ahead. Your line is open.
Hi, gentlemen. Thanks for taking my questions. Most of them have been answered now, but I would have one left. Could you be maybe in position to be a bit more specific as to what you would have in mind in terms of how you want to reduce working capital requirement to sales as a target? Be it into 2018, 2019, 2020, the kind of, let's say, medium-term target you would have in mind, given the success you've had here in 2017.
I think there are still structural-
You see what I mean?
Yeah, I think there are still structural possibilities. Both structural possibilities, but also possibilities within continuous improvements. I think there are still ways. I mean, important part of our business model is stock sales, and we typically have, due to shorter lead times, among other things, better margins on stock sales. So we will increase, hopefully, stock sales as a proportion of the total sales. And that requires everything else equal, more working capital. I think the trick is to be a bit smarter, and that's what we are doing and what we have actions and plans for, when we talk about central stocks, regional hubs, how we work with stocks closer to customers. We measure on every product. We measure turn, stocks turnover.
We, we divide it into what we call slow movers. I mean, stock items that are moving fast, slow movers, and what we call dead stock then. And then we set targets per item, per stock, but we also set targets to consolidate the stocks. And when we move together with Ruukki, we obviously had stock locations on the same markets, two stock locations. We even had two stock locations, one each in the same city on a certain market. So there are still structural possibilities. And for us, it is a three-year plan.
And then, I mean, you shouldn't expect us to generate maybe an operating cash flow of SEK 3 billion every quarter, but you should expect us to continue to generate cash flow from operations, but also from working capital efficiency. And Håkan show the picture of sales, net working capital over sales and moving in the right direction. But I think there are possibilities, also structural possibilities, still, in absolute stock levels, in absolute terms.
I'm not sure I fully get your answer. Is it to understand that as part of your target to increase sales in special steels, et cetera, you will have, let's say, more difficulty to reduce further the working capital requirement, or at least you need to arbitrage between this top-line growth and your working capital requirement because of client needs?
What I'm really saying is that, increased sales in special steels will, everything else equal, drive more working capital. That will be, as I see it, counteracted by structural changes, and, and we haven't been perfect on that one, and we are still not perfect, so I see further possibilities. That's what I'm trying to say.
Okay, understood. Thank you.
How big are these possibilities? Well, there are still possibilities. So working capital efficiency will continue to be high on the agenda for the coming two years. Of course, always, but, but we have increased focus, because, to be honest, we haven't really focused on it.
Thank you.
Thank you. Our next question comes from the line of Cedar Ekblom from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Thanks very much. Two questions from me, gentlemen. The first one is, can you talk about what a stronger SEK means for your business in Q1, whether you see this being a net headwind or a net tailwind for earnings? And then the second question is just on special steels. You have the target to get to 1.35 million tons, and in all honesty, based on the way shipments are growing, you could probably get there by the end of 2018. The next leg, in terms of uplifting EBITDA, is on the mix. Can you talk about how long or how difficult or easy it is to see mix shifts in a particular steel business in terms of market penetration, delivering products, et cetera, et cetera?
Just to understand how the next leg up in profitability and special steels comes through to the extent you reach the volume target in a fairly short-term period? Thank you.
If I start with, as I understood the last two questions, or maybe the second question. I think there are possibilities in a stronger market. I mean, better possibilities to improve the mix. And the mix in special steel is quite important. I mean, we have a variety of different products. I mean, you have everything from armored plate with a very, call it, good margins. You have the high Hardox high tubs, the Hardox volumes with good margins, but you have the range all the way down to construction steel at 700 megapascal. And I think there are possibilities to continue to improve the mix from the normal mix.
The underlying drivers for that is sustainability, the need of increasing productivity, increasing life length, light weighting, and all these projects we are running with customers. So yes, I mean, 1.35 million ton, I'm sure that we will reach, but we will also, I mean, improve the mix within specialty. So there is a mix possibility in special steel as it is within SSAB Europe as well. And, I mean, everything else equal in a stronger market, it should be, if not easier, but I mean, doable to improve the mix as well. I don't know if that answered your question.
It did. I think, you know, just trying to get some clarity on timing, but, by your answer, it seems like it's more difficult to put definitive time frames around improving mix, whereas on the shipment side, it's been-
I think for us, it's an ongoing work and a never-ending work. I mean, if you take Oxelösund, we are nowadays producing more or less 100% special steels. And if you go back a couple of years, we were producing standard plates as well. That production is moved now to Raahe, and we are. So there is a possibility also to, with capacity creep and so on, and productivity increases, to increase the production in Oxelösund, and that will give a better mix as well within special steels. We are also ramping up our QT lines in Mobile, and that will also be helpful for the mix.
Maybe I can just follow that question up. So can you maybe talk about how sticky mix improvement is? And the reason why I ask this question is, you say it's easier to improve the mix when you have an improving market environment. And obviously, some of that will sort of be permanent to the extent you have a softer market environment. But how much of mix improvement is cyclical? In other words, your mix improves when things are better, and it can deteriorate to the extent your customers stop buying those higher quality products when they are under pressure.
I think it.
Can you put any numbers around that, or is that just quite difficult to answer?
Yes and no. I mean, over a business cycle, I would say it's sticky, but in tough markets, you experience some customers saying, "Well, you know, in this tough cycle, we go for good enough materials." So there is. I mean, in tough markets, it is a bit tough, but I would say that it is sticky in that aspect, that when you I mean, when you have launched a new product with twice the life length or half the weight of the application, I mean, you typically don't go back to your old product. So it's a, it is a long-time work. I mean, a customer development project typically takes a couple of years to run, and then it is, I mean, sticky in that aspect.
But you can also see in very tough times, tough business cycles, some customers going for good enough material, which-
Okay, that's helpful.
you typically don't see in a stronger business cycle. So I would say sticky, yes.
Okay. And then just a question on currency. So a stronger SEK, is that a net headwind or a net tailwind to your profitability in the first quarter?
Yeah, the simple answer, as it would be, that it's not beneficial for us, it's the other way around. A weak krona, in general, is good for us. We actually have a sensitivity analysis in the back end of the report. However, then it depends very much which currency is moving, because we buy more in U.S. dollar than we sell. So if the krona gets stronger against the dollar when we buy iron ore and coking coal especially, then that's good for us. But if the krona gets strong against euro, where we sell more in euro than we have cost, then it's negative for us.
Perfect. Thank you.
Thank you. Our final question comes from the line of Carsten Riek from UBS. Please go ahead. Your line is open.
Thank you very much. Just one question which I missed before. It's more on the strategic side. You probably have seen that, that Salzgitter, the IIsenburger heavy plate business, will invest in heat treatment, so quench and tempered lines. Does that actually change supply-demand patterns in the in Europe and could actually lead to more margin pressure in the European business? What's your take here? Because it just came out two days ago.
I saw that, and I mean, there are... I mean, we are not alone on this market. There is a lot of Q&T lines in with different capacities and different capabilities around the world. So I wouldn't say that particular investment, if it comes through, is a game changer.
Okay, perfect. Thank you very much.
Okay.
As there are no further questions, I'll hand back to the speakers.
Okay, thank you. Do we have any final question from the room? No. And then we conclude today's conference, and thank you for your attention, and we wish you a nice weekend.
Thank you very much.
Thank you very much.